Day trading can be one way to make money in the financial markets, but it’s also incredibly risky when some important rules are not followed. Aspiring traders must understand and follow the seven golden rules to become successful in day trading and minimize the risk of large financial losses. These are key principles that all experienced traders abide by – from understanding the market they’re trading to staying disciplined throughout their trades. By following these seven golden rules, you’ll maximize your chances of success and protect yourself against potential big losses due to careless decisions or lack of knowledge about day trading.

7 Golden Day Trading Rules

  1. Understand the market you are trading. 
  2. Set and keep realistic return goals. 
  3. Always manage your risk through position sizing and stop losses. 
  4. Have a trading plan for fast execution of signals. 
  5. Monitor your performance with a trading journal. 
  6. Always stay mentally disciplined. 
  7. Diversify your life, and take breaks. 

1. Understand the Market

The first rule for day trading is understanding the market you’re trading. You must know how the market trends, how volatile it can become, and how liquid it is. You need a good understanding of the market’s historical charts. Backtesting price action signals is also a must. Never day trade in a market you don’t fully understand, and education while trading real capital is more expensive than learning through research.

Day trading is a form of short-term holding of securities that involves buying and selling financial instruments within the same day. It’s a popular strategy among traders who want to take advantage of short-term market movements. Day traders can trade stocks, options, futures, currencies, and other securities on exchanges through their broker.

Regarding stock trading, day traders buy and sell shares in companies listed on exchanges like the New York Stock Exchange or Nasdaq. They look for opportunities to capitalize on small price movements in highly liquid stocks or indexes by holding their positions for only a few seconds, minutes, or hours.

Options are another type of security traded by day traders. Options give investors the right but not the obligation to buy or sell an underlying asset at a predetermined price before its expiration date. Traders use options contracts when they believe there will be significant movement in an underlying asset’s price, and they want to make a directional bet on whether it will go up or down or how much it will move by.

Futures are yet another type of security traded by day traders; these contracts represent agreements between two parties to buy/sell an asset at some point in the future for a predetermined price today. Futures allow investors to speculate on whether prices will rise or fall without ownership over assets since most future contracts settle with cash payments rather than physical delivery of goods/assets being exchanged between buyers and sellers involved in each transaction.

2. Set Realistic Goals

One thing that causes a high failure rate among new day traders is unrealistic expectations. The barrier to entry with day trading is so low it makes new traders think it will be easy. Day trading is a professional endeavor and takes serious mental toughness, a strategy with an edge, and proper risk management to be profitable. This is not easy and takes time.

It’s unrealistic to think you will be a profitable day trader from the start. It’s unrealistic to think you will have bigger returns on a percentage basis in day trading than the best hedge funds and professional traders in a good year. Think in terms of the percentage of returns, not in dollars. It’s also foolish to think that you will not have losses as a day trader. Many of the best traders have only 50% win rates, and some of the best day traders only have 75% win rates.

Setting realistic goals is an important part of day trading. It’s easy to get caught up in the excitement and become overly ambitious with your expectations, but this can lead to disappointment and frustration. The key is to set achievable goals that will help you stay motivated and on track.

Start by setting short-term objectives that are within reach. For example, if you want to make a certain amount of money each month from day trading, break it down into smaller chunks, such as daily or weekly targets. This way, you can focus on achieving one goal at a time instead of feeling overwhelmed by the bigger picture.

Realistic expectations about how much money you can make from daily trading are also important. Many people think they’ll be able to quit their job after just a few months of successful trades – but this is rarely the case. Day trading requires patience and dedication; it may take some time to see consistent profits.

Another tip for setting realistic goals is to create an action plan for yourself so that you know exactly what steps need to be taken to achieve them. This could include researching potential stocks or currencies, creating watchlists, tracking market trends, etc., all while keeping your risk level low enough so that any losses won’t derail your progress too much (if at all).

3. Manage Risk

Risk management is an essential part of day trading. It involves identifying, assessing, and controlling the risks associated with trading to maximize returns while minimizing losses. Risk management strategies can help traders make risk-controlled decisions about their trades and protect them from potential large losses.

Stop-Loss Orders: Stop-loss orders are a type of risk management strategy that helps limit potential losses by automatically closing out a trade when it reaches a predetermined price level. This ensures that the trader doesn’t lose more than they have allocated for any trade. For example, if you enter a day trade at $10.25 a share and set your stop-loss at $10 per share, and the stock drops below this point, your position will be closed out automatically before you suffer further losses.

Position Sizing: Position sizing is another important risk management strategy used by day traders. It involves determining how much capital should be allocated to each trade based on factors such as market volatility, maximum loss to total trading capital if the stop loss is triggered, and expected return on investment if it is a winner (ROI). By properly sizing positions, traders can ensure that their overall portfolio remains balanced and managed for risk of loss even if some trades don’t go as planned.

Diversification: For day traders, diversification is more about having a large watchlist of possible securities to trade, maybe in multiple markets. It can also mean diversifying signals to trade momentum, reversals, and reversion to the mean depending on the type of chart being traded. Diversification is more about expanding opportunities for day traders than managing concentrated risk like it is for investors. Day traders move too fast between trades to be exposed to much correlated risk.

4. Have a Trading Plan

A trading plan is essential for any trader looking to succeed in the financial markets. A trading plan should provide clear guidelines on how you will enter and exit trades, manage risk, and allocate capital. It should also include rules for when to take profits or cut losses and other money management strategies, such as position sizing.

When creating your trading plan, it’s essential to consider what type of trader you are – a day trader – and develop a strategy that fits your goals and trading strategy. A day trader may want to focus on short-term moves in the market using momentum signals on the intraday chart. You can also decide which markets you want to trade in (e.g., stocks, options) and which instruments (e.g., futures contracts). A trading plan creates your trading parameters before you ever enter a trade.

It’s also important to define entry/exit points within your trading plan to know exactly when it’s time to buy or sell an asset based on certain criteria, such as technical indicators or data points from news like earnings reports or economic news releases. This will help ensure that each trade is taken at the right time with minimal risk exposure while allowing room for potential profits from favorable price movements in the market over time.

If you don’t have a trading plan that creates a favorable risk/reward ratio, then everything you do is a mistake as there is no structure, your actions are random, and you have no edge.

5. Monitor Your Performance

Monitoring your performance as a day trader is essential for success. It’s important to be aware of the progress you are making and if you are meeting your goals or not. You need to track your trades and analyze them to make better decisions in the future.

One way to monitor your performance is by keeping detailed records of your trades. This includes noting when each trade was made, how much money was invested, what type of asset it was (stock, currency pair, etc.), and whether it resulted in a profit or loss. Keeping these records will help you identify patterns that can inform future trading decisions.

Another way to monitor performance is by tracking key metrics such as win rate (the percentage of successful trades), the average return per trade (how much money on average you make from each trade), and maximum drawdown (the biggest amount lost during any single period). These metrics provide valuable insight into how well you do with day trading.

It’s also important to review past trades periodically so that you can learn from mistakes and refine strategies accordingly. By looking back at previous successes and failures, traders can understand which strategies work best for their particular trading style, allowing them to improve their results over time.

Your trading journal is a book you write about your trading journey. You can’t fix what you’re not aware of.

6. Stay Disciplined

One of the key factors to success in day trading is maintaining discipline. Without it, achieving consistent profits becomes impossible. Discipline enables traders to follow their trading strategies and not let emotions or ego affect their decisions. Here are some tips to stay disciplined when things become challenging.

  1. Establish defined trading objectives: Knowing what you hope to accomplish through day trading will help you maintain discipline and focus.
  2. Create a trading strategy that details your entry and exit points, risk-management techniques, and profit objectives.
  3. Follow your plan: Follow it once you have a plan in place. Don’t let other influences or your emotions affect your choices.
  4. Keep a trading journal: You can spot errors and remedy them by keeping track of your transactions and reviewing your performance.
  5. Accept responsibility for your trades: Don’t place the blame for your losses on outside variables. Instead, accept responsibility for your choices and use them to improve.
  6. Utilize stop-loss orders: This will help you control the size of your losses.
  7. Don’t overtrade: Limit your trades to a sensible quantity and avoid trying to make up for lost profits by trading excessively.
  8. Consider taking breaks: Trading can be cognitively and emotionally exhausting. Take frequent rests to stay mentally fresh.
  9. Keep informed: Keep abreast of news and changes in the market, but don’t let them divert you from your trading strategy.
  10. Use mindfulness: Try to use mindfulness exercises like meditation along with staying aware of your emotions and ego reactions in real-time.

7. Taking Breaks

Taking breaks from day trading can be beneficial for several reasons. It helps to reduce stress, fatigue, and the potential for making mistakes due to exhaustion or emotional decision-making. Taking regular breaks also allows traders to step back and reassess their strategies and performance, which can help them stay on track with their goals.

It’s important to plan out when you will take your breaks so that you don’t miss out on any potential opportunities in the market. Set aside time each day when you are not actively trading but instead taking a break from it all – this could be anything from reading up on the news related to the markets or simply taking some time away from screens altogether. Make sure that these rest periods are long enough to impact your energy levels before returning to the markets refreshed and ready for action. Walking your dog, petting your cat, or going to a nearby beach or park can work wonders for resetting a day trader’s mind.

Diversifying your life with family, friends, hobbies, entertainment, and exercise can help balance the stress of day trading.

Conclusion

Successful day traders follow key principles of understanding the market, setting realistic goals, managing risk, having a trading plan, monitoring their performance, staying disciplined, and taking breaks. By following these rules, you can maximize your profits while minimizing losses in day trading.

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.